Lawyer’s “Don’t Ask” Policy on Associate Misconduct Leads Court to Apply Prior Knowledge Exclusion

The Appellate Division of the New Jersey Superior Court has held that a prior knowledge exclusion barred coverage for a malpractice lawsuit against an attorney and the firm at which he was employed, where related ethics complaints had been filed prior to the issuance of the policy. Imperium Ins. Co. v. Porwich, 2015 WL 807630 (N.J. Super. Ct. App. Div. Feb. 10, 2015).

The insured was a three-person law firm, solely owned by one of the attorneys who employed the two others as associates.  However, one of the “associates” was listed as a partner on the firm’s website, was listed on the firm’s letterhead, and could bring in clients and access the firm’s trust account.  Prior to the firm’s application for professional liability insurance, this associate was the subject of an ethics committee complaint and reprimand relating to errors that allowed a client’s claim to be dismissed with prejudice.

In the application for the policy, the firm owner answered “no” to the question whether “you are aware of any incident, circumstances, acts, errors, omissions, or personal injuries that could result in a professional liability claim against any attorney of the firm or its predecessors irrespective of the actual validity of the claim?”  The firm owner testified that he did not ask the associate whether he knew of any such actions and had no system in place to monitor his associate’s work.  After the policy was issued, the client filed a legal malpractice action against the associate and the firm alleging they negligently allowed his claim to be dismissed.

The firm’s professional liability policy barred coverage for claims arising out of “any act, circumstance or event committed, omitted, or occurring prior to the Policy Period if, on or before the Effective Date, the Named Insured knew of or could have reasonably foreseen that such act, circumstance or event could give rise to a claim against any of you.”  The court held this exclusion barred coverage for the malpractice lawsuit.  The court noted that “you” in the policy included both the insured firm and any attorney employed by the firm and that the term “Named Insured” included both the firm as an entity and the individual attorneys employed by the firm.   Accordingly, the allegedly negligent associate’s subjective knowledge that his actions would lead to a malpractice claim against the firm triggered the exclusion and precluded any duty by the insurer to defend or indemnify the firm or the associate.

The court emphasized, however, the “distinctive facts of this case,” which involved a three-person firm, with an associate held out as a partner, and a firm policy of not asking associates about potential claims.  Under those unique circumstances, the court held, the firm owner could not reasonably rely on his lack of personal knowledge of the associate’s actions to defeat the clear terms of the policy.  The court did not specify, however, which of these distinctive facts was determinative or how the outcome would have differed in other circumstances.

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